Excerpted from the October 28 edition of Notes From the Rabbit Hole (NFTRH 210)
We are wrapping up October with markets far and wide in the midst of corrections of varying degrees.
The U.S. stock market is following some old clichés in that it apparently hates the uncertainty of the upcoming presidential election and well, it is the spooky month of October after all. The market has done everything it was supposed to do this October and the correction is not yet indicated to be over.
NFTRH's main area of interest is gold for all the reasons brought forward to date. But gold and its wild and slightly touched little brother, silver - along with their precious distant cousins platinum and palladium - remain mired in strong corrections of the formerly over bought reactions out of September's QE hype fest. There is no evidence as yet that these corrections are ready to end.
On November 6, we in the U.S. will either stay with the devil we know or elect the devil we don't (and with a history of flip flops a mile long, I for one do not know the guy in the least - and he was governor of my state). The broad U.S. market may be operating on uncertainty and the precious metals market may be operating under the constraints of a still-Twisting Federal Reserve and its resultant flattening of the yield curve. Gold follows the yield curve, no ifs ands or buts and is apparently shackled to and perhaps through the election.
The graph above shows the average Dow performance (over the previous 14 cycles) in all election years, when the incumbent is due to win and when the incumbent is due to lose. The red box highlights the time frame of our current - post QE announcement - corrective phase.
When it figures this out we might expect a hard decline or a vigorous rise as it seeks to get in line with either the "incumbent party wins" or "incumbent party loses" scenarios on the cycle graph above.
As for gold, it is the same old tired story. I would guess that the Fed watched it and other assets run for a while into what it knew was an imminent QE operation. Conveniently, large commercial hedgers knew enough to systematically build up their short positions into last week's FOMC announcement, which offered no new inflationary operations and reaffirmed the yield curve dampening Operation Twist.
While the Dow may be held captive by the average election year cycle gold is held captive by something else altogether. When the yield curve (shaded area) is rising increasing stress and inflationary pressure (pressure to compromise the currency) is indicated to be building within the system. When it is declining, prudent policy is indicated to have everything under control.
The problem here is illustrated by the FOMC's own words:
"The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities" [i.e. Operation Twist]
It is not a free market telling us that systemic pressures are contained. It is a non-governmental monetary authority with the power to buy and sell debt-based 'assets' in service to painting desired images and outcomes. I am going to leave it for other publications to theorize about how well clued in the commercial traders were to this operation. All we have to know is that the operation is in force until it no longer is.
To summarize, there is little doubt that the financial markets are being held captive to the election process while awaiting clarity and gold is being held captive to deliberately engineered mechanics within the yield curve. Don't fight it. Gold needed a correction anyway. The Fed's supply of short-term debt instruments to sell is finite and gold is going to get where it is going soon enough; as will the stock market.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: No positions were mentioned in the article.